New Delhi: If you live in north or east India, and have a fondness for the distinctive flavours of fast-food giant McDonald’s, it seems you’re going to have a problem. The company’s most popular desserts, the McFlurry, the McSwirl and Soft Serve, are at times unavailable in restaurants across the National Capital Region (NCR) centred on Delhi. Other popular products like wraps and burgers also drop in and out of availability. And perhaps most crucially, the famous golden arches (the signature yellow “M” of McDonald’s) that glint above drive-throughs and restaurants across the world, are no longer to be found on any of the packaging. To put it simply, it ain’t quite McDonald’s any more.
And the way things are going, it looks like tougher times await this watered-down version of McDonald’s in north and east India.
McDonald’s revolutionized fast food in India, opening the doors for other multinational food businesses, setting a strong example for local restaurant chains and making the burger a mass-market product instead of one for the English-speaking elite. But the headline-grabbing conflict between the US-based hamburger chain and its long-time local partner in north and east India, Connaught Plaza Restaurants Pvt. Ltd (CPRL), has escalated to such a degree that peace seems impossible.
Cease and desist
On 21 August, Vikram Bakshi, managing director (MD) of CPRL, woke up to a notice of termination; he realized that in only 15 days, the brand he had helped build in north and east India may not exist any more.
Bakshi is the local partner for north and east India of McDonald’s India Pvt. Ltd (MIPL), the Indian unit of the US-based burger chain. CPRL is a 50:50 joint venture between him and McDonald’s India that has been operating since 1995, when the burger chain entered the country. The partnership agreement was signed for 25 years.
Yet, MIPL terminated the franchise agreement with CPRL for 169 restaurants operating across north and east India. As a result of this termination, Bakshi is supposed to cease using McDonald’s intellectual property. MIPL cited non-payment of royalties as the primary reason for termination of the agreement.
“The termination is a result of a breach, a violation of certain essential obligations that were a part of the agreement typically the default of payment of royalties to MIPL for two years,” said Ron Christianson, global head of corporate relations, foundational markets at McDonald’s Corp., in August. “CPRL was notified of the breaches and was provided opportunity to remedy those; it had failed to do so.”
Bakshi has said the termination jeopardizes the careers of 6,500 employees across the 169 restaurants. “They wanted to make sure that whatever was left of the company would have no meaning by stripping it of the McDonald’s brand,” he said.
This is not the first time Bakshi found himself at loggerheads with the global corporation. The 60-year-old entrepreneur has been fighting McDonald’s for four years (since 2013) in multiple forums: the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), London Court of International Arbitration (LCIA), Delhi high court and even, at one point, the Supreme Court of India.
The termination of franchise pact has triggered another round of legal proceedings, with new appeals and legal heavyweights battling on either side.
The feud goes back to 2008, when MIPL first communicated its intention to buy Bakshi out of the joint venture. It offered Bakshi an initial sum of $5 million—the amount Bakshi invested in 1996—and later revised the offer to $7 million.
“After 13 years and 70 restaurants, they wanted to buy me out at my initial investment,” said Bakshi. “I was shocked.” After going back and forth, CPRL decided to have a fair market valuation done (though MIPL had decided against a third-party valuation), roping in consulting firm Grant Thornton to ascertain the value of the company.
MIPL did not comment on the offer made to Bakshi.
Grant Thornton determined CPRL’s value in 2009 to be $331 million. “After deducting the debt and their share, my 50% came to about $100 million,” said Bakshi. “They said they will look into the details of the study and come back to us. Meanwhile we continued to focus on the operations of CPRL.”
But the road ahead wasn’t smooth. In 2009 CPRL broke even, and by 2010 the company had declared its first profit of Rs9.32 crore. But the global corporation, in one way or another, “kept pressurizing me”, says Bakshi. “In 2009 they even asked me not to borrow any more. Our loan was Rs152 crore then, and it stayed at that level till the end of 2012. We were profitable but we weren’t growing, while the other partner (Amit Jatia of Westlife Development Ltd which runs McDonald’s outlets in west and south India) was allowed to borrow; there was clear discrimination.”
But things seemed to improve around 2012. MIPL allowed CPRL to borrow again that year, when both parties had to bring in more equity and alter the joint venture agreement. CPRL opened 27 restaurants in the same year, the highest number of restaurants opened in a year since 1996. “It was a growth of 125% (in terms of stores) over 2011,” said Bakshi. “We opened 10 restaurants in December alone. Everything was behind us and we were all set to achieve the India dream. In fact, the then McDonald’s APMEA (Asia-Pacific, Middle East and Africa) president had even written to us saying that he was looking forward to stand with us as we realized the dream here.”
Then came the board meeting of 6 August 2013. One of the many items on the agenda was the re-election of Bakshi as MD of CPRL. According to the articles of the company, Bakshi was supposed to be re-elected as MD every two years. “The election was a mere formality as the joint venture agreement said that the partner will be the sole managing director of the company,” said Bakshi.
However, during the meeting, the nominee directors of MIPL on the CPRL board voted against his re-election, accusing him of multiple wrongdoings. The allegations included mismanagement of funds (they alleged that Rs7 crore was moved to one of Bakshi’s own firms); lack of attention (McDonald’s said Bakshi was paying more attention to his own businesses than to CPRL); and conflict of interest (Bakshi owned other restaurants and also rented out his properties to other food chains).
“The primary reason behind ousting him was the lack of attention to CPRL operations,” said a person familiar with the developments, on condition of anonymity. “He was inclined towards his own businesses and was renting out his properties to CPRL’s competitors. The issue was about mutual trust.”
Bakshi says, “The plan was to get rid of me. They (McDonald’s) never sent me any notice about these allegations. In 2011, I was asked to declare all my properties and I had done so.”
Boards and courts
Bakshi challenged his removal at the Company Law Board (now NCLT), accusing McDonald’s of mismanagement and oppression. Later that year, McDonald’s revoked the joint venture agreement and invoked arbitration to settle the dispute in LCIA, on the basis of an arbitral clause mentioned in the joint venture agreement.
In 2013, CPRL had a total of 154 restaurants and was planning to open 35 more, some of which were eventually launched in the following years.
Fast forward to 2017.
In an order passed on 13 July, NCLT reinstated Bakshi as MD of CPRL and restrained McDonald’s Corp. from interfering in the smooth functioning of CPRL and its 169 restaurants.
Calling Bakshi’s non-election illegal, unjust and malicious, NCLT also appointed former Supreme Court judge G.S. Singhvi as administrator to the board, overseeing the functioning of CPRL.
McDonald’s challenge to NCLT order is at present pending in NCLAT. Meanwhile, LCIA, in an award passed on 12 September, asked Bakshi to sell his stake in CPRL. LCIA also called for the appointment of independent experts to determine a fair value for CPRL so that McDonald’s could buy out Bakshi’s 50% stake.
But on 21 August, roughly three weeks before the LCIA judgement was out, MIPL terminated its franchise agreement with CPRL for the 169 outlets it ran in north and east India.
“We have been compelled to take this step because CPRL has materially breached the terms of the respective franchise agreements, and has failed to remedy the breaches, despite being provided with an opportunity to do so,” said Barry Sum, director (corporate relations), Asia foundational markets at McDonald’s Corp.
Following this, Bakshi went back to NCLT, and alleged that the termination of franchise pact was in contempt of the NCLT order of 13 July.
“Exit is the most ignored element in franchise agreements,” said Gaurav Marya, chairman of the franchise solutions firm Franchise India Holdings Ltd. “The lesson in this fight is that both parties should define a pre-agreed structure for exit so that there is no ambiguity later. If the exit terms are open, it’s bound to get bad. There is no perpetual factor in franchise agreements.”
Both MIPL and Bakshi have also moved the Delhi high court; the former has filed a petition to enforce the LCIA award, while the latter has challenged it. McDonald’s has also filed a plea in the Delhi high court against the centre, challenging NCLT’s right to issue a contempt notice.
The matter is now pending in four forums.
Legal experts say both the parties must settle the dispute outside court. “The best way forward is to resolve the issues amicably through mediation,” said Shamnad Basheer, founder of website SpicyIP and former chair professor of intellectual property law at West Bengal National University of Juridical Sciences, Kolkata. “Our courts are back-logged and adversarial. They pit one party against the other. It’s an ‘I win, you lose’ game. People don’t get relief. Whereas mediation can offer win-win and creative solutions.”
While Bakshi had expressed his willingness to settle outside court, in August MIPL informed NCLAT that an out-of-court settlement was not possible.
Who is Vikram Bakshi?
In 1986, Bakshi began a real estate business in the national capital, where he developed commercial and residential projects for multinational corporations. He later ventured into the business of hotels and service apartments. His company, Ascot Hotels and Resorts Pvt. Ltd, currently runs three hotels and five properties of service apartments and highway amenities. “I decided early in life that I would remain on the cusp of retail hospitality and the base of my business will be real estate, as that is my area of expertise,” said Bakshi.
Today Bakshi owns 20 firms in the real estate and retail hospitality segment and more than 40 real estate properties in Delhi alone. He is now working with UK-based Merlin Entertainments Group (owner of Madame Tussauds) for the past three years to set up a branch of the wax museum in India. He also sits on the board of movie-theatre chain PVR Ltd.
With a bouquet of prime real estate in north India and Goa, Bakshi was about to retire when McDonald’s happened in 1995. “I took it as a challenge,” said Bakshi. “Until then I’d made one-on-one sales in my niche businesses, and was keen to be a mass marketeer.”
He claims that CPRL has been his prized business since 1995, while the rest of his concerns were managed by a separate team. That said, Bakshi opened 20 McDonald’s outlets on properties he owned. That number has now come down to less than 10.
“I had to sell a number of my marquee properties to carry on the fight with McDonald’s,” he said. “This bouquet of properties has helped sustain such a long fight with a large multinational.” Bakshi claims that he has spent close to Rs50 crore in the last four years in legal expenses.
His wife Madhurima also sits on the board of CPRL, in addition to three other firms. Two of Bakshi’s three daughters run a separate business, a recently launched jewellery chain called Pandora.
End of the affair
Since MIPL terminated its franchise agreement with CPRL, the 169 McDonald’s restaurants in north and east India are staring at closure. McDonald’s maintains that non-payment of royalties over a period of two years is the essential reason for the termination of the agreement.
In response, Bakshi claims that both of McDonald’s nominee directors on the CPRL board were aware that the royalty money was being used to repay bank loans. As much as Rs46 crore out of Rs186 crore debt was repaid to the banks in two years alone, he said. CPRL pays 5% of the overall sales as royalty to McDonald’s.
McDonald’s did not answer an emailed query on the unpaid royalties.
According to the termination notice served by the burger chain, Bakshi was to cease using the McDonald’s name, trademarks, designs, branding, operational and marketing practices, policies, food recipes, and specifications from 6 September.
“As the franchiser for India, MIPL provides the brand, the system, business practices, quality and safety standards and operational technologies,” said Sum of McDonald’s, adding that the local partners operate the restaurants by hiring employees and handling day-to-day transactions with suppliers and landlords.
“From an intellectual property perspective, if there is a franchiser-franchisee issue and there is a break in the partnership, law states that licensor has all the rights to the intangible assets concerning the brand including trademark, recipes and other specifications,” said Vaibhav Vutts, founding partner at Vutts and Associates Llp, a Delhi-based boutique intellectual property firm. “Under no circumstances can the licensee claim rights to the brand name.”
Vutts added that the only remedy available to the licensee (Bakshi) is “his/her dues, which are decided by the verdict of the legal forums”.
However, Bakshi has continued to operate all the restaurants, despite repeated attempts by McDonald’s to shut them down. In June, CPRL had to shut 43 out of 55 restaurants in the national capital after the company’s failure to renew their eating house licences. But in September, Bakshi reopened 21 of these 43 restaurants. As of now, all restaurants are operational except four in NCR.
“There is a lot of uncertainty associated with the McDonald’s brand in north and east India and this will definitely impact the image of the brand in the respective regions,” said brand expert Santosh Desai, chief executive and MD of Future Brands Ltd. “Usually, ownership and management issues don’t travel down to the consumers but when there is uncertainty about the quality and reputation of the brand itself, it creates consumer anxiety.”
In a bid to enforce closure, MIPL has asked its vendors to stop transacting with CPRL. In a letter to all suppliers dated 11 September, MIPL (as the master franchiser) had said CPRL is no longer permitted to operate McDonald’s restaurants and that it must cease the use of McDonald’s intellectual property.
Key vendors of MIPL include Vista Processed Foods Pvt. Ltd, which supplies chicken, vegetable patties and fresh produce; Schreiber Dynamix Dairies Pvt. Ltd (cheese), Cremica Foods Industries Ltd (sauces), Mrs. Bector Food Specialties Ltd (buns) and Amrit Foods (dairy products). Radhakrishna Foodland Pvt. Ltd is the logistics and distribution partner of the company for north and east India.
Bhupinder Singh, CEO of Vista Processed Foods, did not respond to an emailed query. Calls and text messages to spokesperson of Mrs. Bector Food Specialties and Schreiber Dynamix Dairies went unanswered. The spokespersons for Amrit Foods and Cremica Foods could not be reached for comment.
According to a report in The Wall Street Journal dated 9 October, Amitabha Ray, MD of Schreiber Dynamix Dairies, said that his company had stopped selling dairy products to the outlets after being contacted by McDonald’s.
Several McDonald’s restaurants in the national capital have faced issues with dessert products, wraps and packaging. “On being served with their (McDonald’s) notices, certain suppliers have stopped transacting with us, including the paper suppliers,” said Bakshi. “For the time being we have gone with generic white packaging. We are looking for alternate suppliers wherever there is a supply issue and have already found some replacements. There are some suppliers who are coming back to us.”
However, Bakshi claims that McDonald’s is not permitted by law or any other authorization from CPRL to discharge any action on behalf of CPRL. “They would need a BoD (board of directors) resolution for that and they do not have any of that. They (suppliers) take their orders from CPRL, raise invoices to CPRL and receive payments from the latter,” he added.
“As developers, we are concerned only about our customers,” said Pushpa Bector, executive vice-president and head of DLF Premium Malls, which house six McDonald’s outlets. “We had served a notice to CPRL when the outlets were shut. For now, McDonald’s outlets have reopened and are operational. We will look at the customer feedback on the quality of the products and take any further call.”
So far Bakshi has been paying the dues to all the stakeholders of the closed restaurants and claims that he will continue to do so. MIPL said that it is “open to working with CPRL to mitigate the impact on employees affected by this situation, although CPRL is ultimately responsible to its own stakeholders”.
“We understand that the termination of the franchise agreements for the restaurants in north and east India will bring uncertainty to many,” said Sum of McDonald’s.
“As MIPL is taking steps to exercise our legal and contractual rights consequent on the termination, a priority is to mitigate any impact on affected parties. It will take time to bring the current situation to a final resolution.”
In 2016-17, CPRL recorded revenue of Rs709 crore, up 4.6% from the previous year. The company had earned Rs672 crore in 2015-16.
The other partner
While the company has struggled in north and east India, Westlife Development, which owns the master franchise rights for west and south India, through its unit Hardcastle Restaurants Pvt. Ltd, has seen a 25% increase in revenue in the last four years.
The company started out as an equal joint venture between MIPL and Amit Jatia, vice-chairman of Westlife Development. In 2011, MIPL opted to exit the equal joint venture for an undisclosed amount, converting it into a franchisee arrangement.
“This development was in line with McDonald’s global alignment,” said a person familiar with the development, on condition of anonymity. “While the joint venture was helping the brand, a developmental licensee deal was much more beneficial in terms of expansion. It was a win-win situation because the brand has been able to leverage the knowledge of the local partner in a better way. Moreover, the global company didn’t have to participate in the day-to-day working of the venture.”
Westlife Development currently operates more than 260 McDonald’s restaurants in 20 cities in west and south India. “Between 2004 and 2012, we have doubled our business,” said Jatia. “We have been reinventing ourselves over the years. For the last eight quarters, we have positive same-store sales growth. In seven out of the last eight quarters, we had the best results in the industry.”
Has the legal battle in north and east impacted the overall image of the brand? Jatia says that the financial results of the “west and south speak for themselves”. For the year ending March 2017, Westlife recorded Rs930.8 crore in revenue, up from Rs833.4 crore in 2015-16.
The company opened 22 new McDonald’s restaurants in 2016-17 and saw an increase of 15 million in footfalls.
People who have worked closely with both the companies feel that while Westlife has done well for itself and the brand, CPRL was the clear leader in the first years of the arrangement, until the internal dispute erupted.
A person familiar with the functioning of both the organizations said on condition of anonymity: “It may be debatable but most of the people who have worked with both agree that CPRL was the face of McDonald’s until 2008 when the feud started. The entire legal episode has really hampered the functioning of CPRL.”
Yet, others believe that there is no difference between the two and that both run the show scripted by the global corporation. “There isn’t much difference between the working of the two organizations. Both are masters of their game but it is McDonald’s which runs the show. Both companies are working on predefined principles set by the global corporation. A McDonald’s restaurant will run like a McDonald’s restaurant no matter who runs it,” said another person, who did not want to be named.
McDonald’s vs Domino’s
India has the sixth largest food retail industry in the world, estimated at Rs3.1 trillion in 2016. Of this, quick-service restaurant (QSR) chains account for Rs9,130 crore, according to data from consulting firm Deloitte.
Till 2012, McDonald’s was the market leader, with 10.9% of the QSR market, followed by Jubilant FoodWorks Ltd-operated pizza chain Domino’s, which had 10.2% of the market.
Jump four years to 2015 and Domino’s is more than double the size of McDonald’s, with a 16% market share, with the latter’s share dropping to 7.4%.
Analysts say McDonald’s has been losing ground due to the growing acceptance of pizza over burgers across consumer segments. “Pizza is a collective meal,” said Rajat Wahi, partner (management consulting) at Deloitte India. “Indian consumers are increasingly preferring pizzas over burgers. Additionally, a lot of new formats have come up over the past few years. Existing chains need to keep evolving by adding new items on the menu and experimenting with the format to be relevant.”
India has become the second largest market after the US for Domino’s, according to data from Deloitte.
“It’s true that Domino’s was expanding very rapidly and pizza consumption was going up,” said Bakshi. “But at the same time, we were not growing at the pace we should have been. We were not allowed to increase the menu prices. We couldn’t open as many stores which gave the competitors an opening to move ahead.”
According to data from Deloitte, Domino’s operated 1,107 outlets in India in 2016, against 460 McDonald’s locations.
Going forward, Jubilant FoodWorks, which operates Domino’s Pizza and Dunkin’ Donuts outlets in India, plans to open 30-40 Domino’s outlets in fiscal year 2018, a company spokesperson said, in an emailed response to a query from Mint.
The promoters of HT Media Ltd, which publishes Mint, and Jubilant FoodWorks are closely related. There are, however, no promoter cross-holdings.
The uncertainty hanging over McDonald’s has helped its competitors in more ways than one.
“Direct competitors of McDonald’s will benefit in terms of sales,” said Riyaaz Amlani, president of National Restaurant Association of India, and CEO and MD of Impresario Entertainment and Hospitality Pvt. Ltd, which runs restaurants like Social and Smokehouse Deli.
“McDonald’s in India owns a large chunk of real estate and employees, which unfortunately are now low-hanging fruit for other people.”
Added a QSR industry executive asking not to be named, “It’s true that McDonald’s rivals are gaining market share. A lot of reports indicate this. It’s a normal phenomenon actually. A direct competitor is on the verge of being removed from the industry.”
Pizza Hut declined to comment. Burger King did not respond to an emailed query seeking comment. In an emailed response to a query from Mint, Jubilant FoodWorks said the company had grown robustly on the back of product upgrades and that it had not hired anyone from McDonald’s.
“McDonald’s has the best real estate in the business,” said Zorawar Kalra, founder and MD of Massive Restaurants Pvt. Ltd, which owns brands such as Pa Pa Ya, Farzi Café and Made in Punjab. “All the prime locations are with McDonald’s, which have been available to them at a low cost. Although the rents will be higher, we would love to get some of the spots if they are relinquished. As for employees, we are open to taking them on board… whatever is happening is really unfortunate.”
Key personnel at different levels at McDonald’s have already started leaving for greener pastures. “We have hired six people who are ex-McDonald’s,” said Karan Tanna, founder and CEO of food and beverages franchise management firm Yellow Tie Hospitality Management Llp. “We are looking to hire four more for current restaurants and our future expansion as well. The plan is to hire 10 employees immediately and 10 in the next month. McDonald’s has good training programmes; we will get a good product.”
Abneesh Roy, senior vice-president and research analyst (institutional equities) at Edelweiss Securities Ltd, said that it is a good opportunity for other firms. “Consumers are bound to move onto other brands. It will be a tough journey ahead for McDonald’s until the situation returns to normalcy.”
McDonald’s has repeatedly announced its commitment to the Indian market and its intention to build a bigger and better brand. “We look forward to growing our business and rebuilding our brands in north and east India,” said Sum. “We are actively progressing towards finding the right developmental licensee partner for the region.”